The course weblog for PA5113, State and Local Public Finance, at University of Minnesota

Tuesday, March 31, 2009

[Group 2] Dime a Drink: How much more will you pay for a beer?

Currently, Minnesota’s alcoholic beverage tax has two forms, a special excise tax and a special gross receipts tax of 2.5%, which adds to the 6.5% state sales tax. The special excise tax is imposed on manufacturers and wholesalers of alcoholic beverages and is a specific dollar amount based on the amount per unit produced (in gallons) with different tax rates for each type of alcohol. The special gross receipts tax applies to retailers selling alcoholic beverages like restaurants, bars, and liquor stores. (Facing alcohol’s costs to society) According to the Minnesota Department of revenues, in fiscal year 2008, the excise tax generated revenues of about $73 million and the gross receipts tax generated about $65 million in revenue for a total of about $138 million.

House File 2125, as introduced on March 25, 2009, proposes to change the current law to increase the excise tax on alcohol. The increased revenue from this tax will fund a variety of alcohol-related services--primarily chemical dependency treatment, which is similar to some iniatives by other states. (Alcohol Tax Makes Policy Sense and Economic 'Cents') Therefore, “the costs of fighting alcohol abuse [will] be funded by those who abuse alcohol”.

As a sin tax, the alcohol tax is intended to change people’s behavior and reduce the negative social externality associated with drinking. This bill is nicknamed the dime a drink bill because, on average, the tax will increase the price of one twelve ounce glass of beer by ten cents. Officially, the excise tax increase is a $1.06 increase per gallon of regular beer, a $2.12 increase per gallon of wine, and a $12.87 increase per gallon of distilled spirits. According to a recent research (Washington Post, “Booze Taxes Lower Drinking Rates”), consumers are price sensitive in liquor consumption. But in general, the efficiency of the bill in changing unfavorable drinking behaviors is ambiguous, considering the complexity of human behaviors.

Adequacy is a major concern related to this tax. Alcohol in Minnesota is a highly taxed product. The excise tax on alcohol is among the highest for states with excise tax, and our 2.5% gross receipts tax is higher than that of neighboring states, most of which do not impose such a tax. Even though the tax rate is already high, it is not enough to support the proposed temperance program. In fiscal year 2002 Minnesota raised a combined $234 million in excise and sales taxes on alcohol, well below the estimated $4.5 billion in alcohol-related costs. (Also see an extensive discussion on Minnesota Public Radio, "Death by drinking")

On the bright side, the change in tax rate is simple to administer. According to the Taxation of Beverage Alcohol in Minnesota, “it would only require a tax rate change in the current excise tax system and…would be less likely to increase tax delinquencies than would a tax at retail.” If implemented, the tax is expected to bring in an additional $255,477,393 in revenue.